Monday, January 31, 2011

With the year now well underway, it's time to turn our attention to what the IPO market might throw our way in 2011. In terms of the number of new issues, last year was an improvement on 2009. Will 2011 be a better year again for investors in Australian share floats?

2010 saw 96 new listings worth a total of $7.5 billion. The monster float of the year was QR National. And despite some investor doubt in the run-up to the QRN share offer, the share price has actually performed fairly well. Shares are trading at $2.80 as I write this, which is a reasonable premium to the $2.45 paid by retail investors. Of course such short term price movement is likely to be driven more by sentiment than by fundamentals. The real test for QR National will be the next couple of years operating results.

Looking ahead, the first major float of 2011 is rumoured to be Nine Entertainment Co. This IPO could be worth as much as $5 billion. Nine Entertainment Co is the new name for the PBL Media assets bought by private equity CVC Capital Partners in 2007.

Here is the blurb from the home page of Nine Entertainment Co website:

We are Australia's most diversified entertainment company. Our assets include the Nine Network Australia, ACP Magazines, Ticketek, Acer Arena and majority interests in carsales.com, a 50% interest in ninemsn as well as interests in the Australian News Channel (Sky News).

While it looks like there are some quality businesses within the group, the attractiveness of this float will depend upon pricing and the debt levels held by the entity which eventually lists.

Another interesting share float in 2011 might be Intrepid Travel. Intrepid Travel provides adventure travel services. While the company is not as large as some of the other floats which might come along this year, it does have quite a strong brand. The business is was started 21 years ago. It made a pre-tax profit of $10 million from revenues of about $120 million.

Ascendia Retail is another name which keeps doing the rounds. This group contains Rebel Sport and was rumoured to be a starter for an IPO last year. However, given the negative sentiment toward listed retail companies right now, owner Archer Capital might be inclined to hold on until more positive signs emerge from this sector of the market. It's worth noting that Archer also owns MYOB and iNova Pharmaceuticals, both of which I presume it would be looking to sell out of at some stage.

Other retailers currently held by private equity firms which may eventually come back onto the market include Repco (owned by Unitas Capital) and Colorado Group (owned by Affinity Equity Partners) although according to this article in The Australian, Colorado may be some way off being in a position for a public offering.

Two other companies rumoured to be considering their IPO options are Link Market Services KKR's Seven Media Group, although these may end up happening in 2012 or beyond.

Sunday, January 30, 2011

This is a question which can almost cause good friends to come to blows. It seems that investing in residential property is such an emotional issue for some people. Well to add fuel to the fire I found the results of a study published last year found that investing in shares produced a better after tax return than investing in property.

The report was commissioned by the Australian Stock Exchange and prepared by Russell investments. It investigated the returns of a number of asset classes over the past 10 and 20 years taking into account the impact of investment costs, tax and borrowing on the on the final performance figures.

The headline result (certainly from the ASX's point of view) was that Australian shares outperformed all other asset classes on an after tax basis over 20 years for investors on both the lowest and highest marginal tax rates.

However, over 10 years, Australian residential investment property was the winner. The GFC had a major impact on the performance of Australian shares over that period.

While the long-term performance of Australian shares as pointed out by the report has been used for marketing purposes by the ASX, there are a number of other conclusions made by the report which are important for investors regardless of your preferred asset class.

Borrowing to invest has been a winning investment strategy. Both Australian shares and Australian residential investment property returns have more than offset the costs of borrowing to invest in these asset classes.

Tax is also an important consideration. It has had a major impact on the final performance figures. The report also points out that dividend imputation for shares and the capital gains tax discount for both shares and property give these asset classes an advantage over bonds and cash.

The report is only around 10 pages long and is well worth reading. Regardless of the actual performance figures, I found it provided an good framework within which to think about investment performance.

Wednesday, January 12, 2011

It might surprise you to learn that over the long term dividends make up a large part of a share portfolio's returns. In a study by Elroy Dimson, Paul Marsh and Mike Staunton (see Keeping faith with stocks) it was found that "The longer the investment horizon, the more important is dividend income."

And for retirees, dividends are the life blood of their investment portfolio. While growth in the value of the portfolio is important in order to keep pace with inflation, it is the steady stream of dividends which pays the bills.

Even though I'm not a retiree, I still like dividends because along with my regular savings, they provide me with the cash to make further investments without the need to sell existing ones.

So with all of that in mind, I thought it might be interesting to look at the dividend yields of the stocks that make up the ASX100. The table below lists the top 10 dividend paying stocks.

ASX Code

Company Name

Current Price

Dividend Yield

Franking

Payout Ratio

DUE

DUET Group

$1.69

11.9%

0%

171%

SKIDA

Spark Infrastructure Group

$1.14

11.4%

0%

169%

TEL

Telecom Corporation of New Zealand Limited

$1.71

10.6%

0%

120%

TLS

Telstra Corporation Limited

$2.84

9.9%

100%

90%

MAP

MAp Group

$2.96

9.2%

0%

-164%

GFF

Goodman Fielder Limited

$1.32

8.4%

20%

92%

WDC

Westfield Group

$9.60

8.2%

0%

116%

APA

APA Group

$4.15

8.1%

0%

169%

WAN

West Australian Newspapers Holdings Limited

$6.40

7.3%

100%

100%

CFX

CFS Retail Property Trust

$1.76

7.2%

0%

120%

Top Dividend Paying Stocks In The ASX100

The dividend yields on offer here range from 7.2% right up to 11.9%. However, as you might have noticed, a number of the stocks have payout ratios above 100%. This is probably not sustainable as it means these companies are paying out more in dividends than they are earning in profits.

Lets knock out those companies with a payout ratio of over 100% and see what we can find.

ASX Code

Company Name

Current Price

Dividend Yield

Franking

Payout Ratio

TLS

Telstra Corporation Limited

$2.84

9.9%

100%

90%

GFF

Goodman Fielder Limited

$1.32

8.4%

20%

92%

QBE

QBE Insurance Group Limited

$18.14

7.1%

20%

66%

IOF

ING Office Fund

$0.57

6.9%

0%

70%

TAH

Tabcorp Holdings Limited

$7.13

6.8%

100%

71%

MYR

Myer Holdings Limited

$3.47

6.7%

100%

75%

CPA

Commonwealth Property Office Fund

$0.83

6.7%

0%

75%

NAB

National Australia Bank Limited

$23.89

6.6%

100%

73%

DJS

David Jones Limited

$4.75

6.5%

100%

91%

WBC

Westpac Banking Corporation

$22.06

6.5%

100%

72%

Highest Yielding Stocks With Payout Ratio Below 100%

The list has changed somewhat but with dividend yields ranging from 6.5% through to 9.9%, the income potential is still quite respectable.

Other Things To Check

The exercise we have just been through is a simple one. We would obviously need to do more research before committing any of our hard-earned cash to buying any of these shares. While not an exhaustive list, what follows are a couple of the items on my investment checklist - things I would check before investing..

One important factor I like to consider with any sharemarket investment in the level of debt and the company's ability to service that debt. So I'd be checking each of the company's debt to equity ratios and their interest coverage ratios (a measure of how able a company is to make its interest payments).

Dividend growth is another thing to consider. I like to see the dividend amount rising each year. It not only provides me with a growing income but also demonstrates that the business is growing and has strong cash flow.

What Have We Learnt?

I find this sort of comparative analysis to be very useful. It might be finding the best dividend paying stocks or the shares with the lowest price to earnings ratios or those with the highest return on equity - it doesn't really matter. What matters is looking at the stock market from all of these different angles and seeing how various investment opportunities stack up against one another.

I should point out that none of the shares mentioned in this post should be considered recommendations. Make sure you do your own research.

Tuesday, January 4, 2011

With 2010 out of the way, it's now time to turn our our attention to 2011. While I'm sure we'd all like to have a crystal ball which we could look into to see what shares prices have done up to the end of 2011, the reality is the future is unknown. So how can we best position our investment portfolios to grow in 2011? In other words, what are the best shares to buy in 2011.

Retail Shares?

One sector of the Australian stock market which has taken a pounding in recent times is the retail sector. Harvey Norman boss Gerry Harvey was pessimistic at the company's recent AGM. Discount retailer The Reject Shop, which has been an outstanding performer over recent years, shocked the market recently with a profit downgrade. The announcement saw The Reject Shop shares drop to below $13.00 from over $17.00. And shares in JB Hi-Fi have fallen in recent times as well over the uncertainty in near term retail sales figures.

It seems that consumers have slowed down their spending. Some theories to explain this phenomenon are interest rate rises, consumers saving more and paying down debt, the withdrawal of government stimulus spending and general uncertainty over the economic outlook. While any or all of these explanations may be true, perhaps the most important question any savvy investor should be asking is whether the change in sentiment points to a longer term change in spending habits or is just a short-term belt-tightening exercise.

But being the contrarian that I am, I can't help but wonder whether this might be a prime place to look for good shares to buy in 2011. There are a number of very good companies operating in this sector. By looking only at businesses which have conservative debt levels and a history of generating strong returns on capital I should be able to identity those companies which will be able to get through a retail downturn without needing undergo equity diluting capital raisings. And if I take a longer term view (and don't pay too much) I should see a decent return on my investment when retail sales return to normal.

Best Shares This Year The Worst Of Last Year?

Another interesting place to look for shares which may outperform this year is among last years losers. Those value investors among us might like to sift through the rubble to see if there is any value there. The theory is that these companies are currently unloved by the market and as such may be trading at bargain prices.

To get you started, here is a list of the 10 worst performing stocks in the ASX 100 index for the last year.

Downer EDI Ltd

Toll Hldgs Ltd

Primary Health Care Ltd

Aristocrat Leisure Ltd

Macquarie Group Ltd

Aquarius Platinum (Bermuda)

Fairfax Media Ltd

Harvey Norman Hldgs Ltd

Leighton Hldgs Ltd

QBE Insurance Group Ltd

Please note that these are not recommendations to buy. The list is merely a place to begin your search for a bargain. Make sure you do your home work though as there is often a very good reason for a company's share price to be marked down. It is your job to discover whether the share price punishment is justified.

Strong Aussie Dollar

One of the investment themes as we enter 2011 is the strong Australian dollar. As I write this article it has gone beyond parity and some economists are predicting even further strength. So when deciding what shares to buy in 2011 it might be worth looking at those companies which will benefit from the strong currency.

International travel is cheaper with a strong Aussie dollar. Australians travelling abroad have more purchasing power now and this may drive an increase in the number of Australians holidaying overseas. Obvious beneficiaries of this trend would be airlines like Qantas. Also Travel Agents like Flight Centre could do well.

Another sector which traditionally benefits from a stronger Australian currency is retailing. Those retailers who import their wares from overseas are able to source goods more cheaply and pocket some of these savings in the form of higher margins. However this year anecdotal evidence is that price discounting is eating away at any of these extra profits.

When using these broader investment themes to drive your share purchases, it's important to take price into account. The reason I bring this up is that the market may have already bid up the prices of companies expected to do well from the strong Aussie dollar. So much so that the share prices may already be unrealistically high.

Putting on my contrarian investor's hat once again, maybe another way to play the recent currency gains is to look for companies whose share prices have fallen as a result of the stronger dollar. As the market tends to overreact both on the upside and the downside, perhaps there is value to be found among exporters and other companies whose businesses suffer in times of higher exchange rates. As an added bonus, the share prices of these companies would benefit from renewed investor interest should the dollar fall again.

As I stated above, make sure you do your own research before making any purchases (none of the stocks mentioned in this article should be considered recommendations). Hopefully the ideas discussed will help you find some good shares to buy in 2011.